Vous êtes sur la page 1sur 18


Software Pricing Strategies

Jasvinder Singh jsingh@cs.helsinki.fi University of Helsinki, Department of Computer Science

interpreted as an important tool in the marketing toolbox which a company needs to consider before has conventionally been launching a product in the market. The managerial group in the software industry have conventionally improved their pricing strategies based on costrelated criteria. Cost-based pricing strategies concentrates on the product value to the customer. Furthermore, they are also focusing on the shortterm value to the vendor. On the other hand valuebased pricing is based on the customer's understanding of the value of the product. Valuebased pricing strategies pays attention on innovating long-term value for the customer. From a marketing view, the aim of pricing strategy is to set a price that the customer sees in the product while meeting profits on investment goals [1]. This paper presents a comprehensive view about the conventional cost-based approaches to software pricing. These ideas to software pricing are shortterm and places the sellers interests over the interests of the buyer. On the other hand, pricing approaches are based on customers perceptions of value are planned and long-term in nature. This is due to the fact of capturing unique value from each market segment through the pricing mechanism. Furthermore, we will discuss how software firms need to invest to make sure long-term benefits of value-based pricing. The investment of software Software pricing

concentrated on the marketer's internal business aims of covering costs, attaining specified margins, and meeting the competition. Pricing approaches such as flat price, tiered pricing, usage-based, per user, etc, are often strategic in nature and easily matched by competitors, which can weaken profitability by accelerating the market transformation for a unique branded product into a market, based on undifferentiated price competition. On the other hand, a valuebased methods charges a price based on the customer's perceived value of the advantages received. This seminar paper discusses about a value-based method to pricing that is dependent on the company's pledge to invest in the development of its long-term pricing capital. This investment in practical methods and principles, infrastructure, process to innovate, measure, analyze, and capture customer value is the success key for long-term pricing strategy

Index Terms- SPS, Software Pricing Strategies. 1. INTRODUCTION

Software pricing strategy plays a significant role in augmenting software market sales. It can be

companies in a strategic pricing center helps in making quality decision making about the product during the product development cycle. Moreover, it also provides good understanding about how customers value price alternatives and come up to prices that they are willing to pay.

Cost-based pricing is thrown into a confusion by a circular logic. As discussed above price is based on unit-volume assumptions but at the same time price is the determinative factor for the sales volume. The inability of the managerial group in the software industry to model the impact of price on volume and vice-versa calls cost-based pricing into question. Cost-based pricing circular logic can lead to excessively high pricing in weak markets and excessively low pricing in strong potential markets [4]. For example, if a company loses volume and market share to a belligerent competitor, then the managers making usage of cost-based model will be under extreme pressure to augment prices to recover their augmented costs and to recover their lost margins. On the other hand, in situations of excess demand, where a backlog of orders exist, the costbased system is slow to raise prices since profit and volume goals are being met. Therefore, the company provides subsidy to the customers who would be willing to pay more to acquire the product more quickly and thereby loses out on significant potential profits. An intelligent competitor who is aware of this situation can take advantage by taking these back ordered customers away. The generally accepted accounting principles (GAAP) for determining the value of technocrat companies have come under considerable criticism over the appropriateness of reported cost data [5]. GAAP accounting was developed at times when there is a clear differentiation between labor and capital. The cost of production factors such as machine tools, computers, and moving stock were

2. Pricing Background & Traditional CostBased Pricing

Cost-based software pricing is one of the most popular method which relies on the information provided by the cost-accounting system. This authentic data is generated to produce operating results, budgets, and financial statements. Marketing and product managers are trained to price the software to yield a desired return on fully allocated costs. There is no product approval in a business development plan for a novel market without considering an lucrative return on investment (ROI) [2].This profitably calculations ignores the voice of the customer and serves as a layout plan for average market results. Cost-based pricing strategies can tap the power of the market sellers to force a higher price on to the seller. The basic problems with cost-driven pricing comes from the cost assumption made about the product cost. Firstly, unit costs are dependent on the volume. As the projected volume varies, the fixed cost per unit associated with it also changes. The allocation procedures, for example direct labor hours or any other substitute metric are also inaccurate. Therefore, product costs are inaccurate at best and a continually moving target at worst [3].

shown on the company's balance sheet and devaluate over times as the assets were used to generate revenues. Theoretically, if company compares its revenues and expenses for an appropriate time frame (including depreciation schedules), then a relatively precise picture of company's costs and profitability come into sight. According to [6], when GAAP concept is applied to business sector where the production factors are labor related, such as software, it is observed that it not only produces confusing results that not only exaggerate product costs, but also can cause valuation problems concerning the company's stock price. Furthermore, software companies are distinguished by the innovative efforts of their employees. The salaries of software programmers and architects, under GAAP are not seen on the company's balance sheet. This practice augments product costs and places extreme pressure on the pricing mechanism to maintain margins. The final reason for too much emphasis on cost-based pricing is the missing relevance of outdated accounting practices that inflate product costs in the short run. GAAP imprecisely matches knowledge-based product costs to the resulting income stream [7, 5]. 2.1 COST-BASED CONCEPTS OF VALUE The conventional software pricing model addresses customer value which is often calculated as profit. Profit is figured out by deducting the software's development cost from its price (i.e., the total value to the customer). In totality, the value to the customer is defined in terms of particular needs fulfillment, good will, ease of use, opportunity costs, the business value of information, or other

unmeasured factors [8 ,9]. This type of customervalue assessment is possible through refined market research techniques. It is also noticed that many software projects proceed without considering this critical information. The process of collecting data from potential customers is expensive and time consuming. The default measurements are the ones that are more readily determined through economic analysis. The factor such as transaction costs savings and other total cost of ownership (TCO) related metrics are most often used, but this method neglects potential value drivers that may be more significant to the customer [10]. 2.2 EARNED VALUE CONCEPT Earned value is a related cost-based concept that is used for trailing a software's adherence to the original project budget. Earned value pays attention on explaining the cost variances between the amounts allocated for the work and the equivalent dollar volume of work completed during a specified time duration. The cost variances are noticeable to specific project tasks, which can then be evaluated for corrective action [11]. These cost-based ideas to measure value form the basis of the main software engineering economics models [8 ,9, 12]. The cost-based approach to valuing software products has relatively large support from the field of strategic cost management [7, 13, 14]. Those who are practicing activity-based costing(ABC) approach to determine product costs notices that conventional cost information is useless for managers who need to base strategic resource allocation decisions on accurate product costs. The

overhead allotment process for assigning costs such as logistics, sales, production, finance, and general administration to individual products can be improved by ABC methods. Conventional methods of overhead allotment use direct labor hours that tend to over burden less-complex products and high-volume products. On the other hand, they under allocate overhead cost to complex to lowvolume products. The resulting cost distortion can produce misleading profit estimates and weak decision making. A company's cost behavior and relative cost position in an industry are obtained from the valueproducing activities of the firm. Each value activity has its own cost structure. After identifying the significant value chain, cost of operating and asset costs are designated to the product related activities as they support. The company can assign costs to products and have a clear understanding of its real cost position by analyzing the cost drivers of its value producing activities[7]. While on the contrary, ABC methodology can lead to more precise product costing but they do not highlight on how to price software products. The management group of the company have a more precise understanding of the real cost of the product over the relevant volume range. This is helpful in knowing if a profit can be made at the price which the customer is willing to pay. If the price of the product is known, ABC can show the way of better product mix and capital investment decisions [7]. 2.3 DIFFERENTIATION-BASED STRATEGIES Differentiation-based strategies seek to create

products that are seen to be dimensionally unique and are valued by specific group of customers. Differentiation is basically based on features, advantages that are seen to be significant, distinguishing, preemptive, superior, and affordable by target customer [15]. There is a necessity for the product developers to conduct market research in order to determine which product attributes will affect a strong differentiation strategy. Without in depth market analysis, the default scheme will return to cost leadership, which can be calculated with relative correctness. Low cost can be an effective differentiator if the cost advantage is so strong that competitors cannot match it. On the other hand, technology related markets such as software, technology advances tend to reduce or eliminate cost advantages relatively quickly.


Pricing disputes is the most quarrelsome issues that arise between software vendors and their customers. Pricing resistance originates from high software prices and perceptions that the vendor puts its own interest ahead of those of the customers. A lack of trust can result from oppressive, cost-based pricing. As a result of the relatively big investment in software research and development when compared to other product costs, software vendors have high fixed cost (i.e., software development) and relatively low variable costs (i.e., excluding service and support). The situation outcomes makes software product managers to put heavy emphasis on the aims of cost recovery and rapid return on investment through the pricing mechanism. This pressure leads to pricing strategies that are not

clearly customer-valued oriented [16, 17, 18]. The vendors cost-driven, rate-of-return-based

clasp discounts for large purchasers, government, and members of preferred buying organizations [21]

pricing models are supported by promising the customers improved return on investment (ROI) through augmented sales, reduced costs, reduced risks [2]. Risk includes customers benefits that have indirect financial effects such as innovating competitive advantage, legal compliance, reduced liability, or minimized financial exposure. These benefits are difficult to determine, therefore customers look to the default metric of augmented return on investment through cost savings and augmented sales as the main justification for purchasing enterprise-scale software[19, 20]. The study of common software pricing approaches are as follows: 3.1 FLAT PRICING Users pay a fixed price for limitless usage of software product. This idea enables customers to more easily know in advance for what they will pay for the software usage. The fixed price is usually restricted to a specific user or machine. Many software offerings to the consumer are priced in this manner. Some level of online support is typically built for a limited time frame. The main disadvantage to this method is the lack of flexibility in customizing a price for individual customer based on customers required values. Some customers will have to pay more than they would like and may be intended to seek better deals. Others will enjoy a subsidy since they would be willing to pay more for the higher value they perceive. A fixed-price strategy can be segmented to

Flat pricing also reduces the complexity of the vendor's pricing model since the price is set to return a dependable but fixed rate of return. Prices are based on a financial return model, not on customer value. Prices are augmented when cost increases. America online(AOL) has used such a pricing strategy throughout much of its business life. It charged a high fixed price for dial-up Internet connectivity and justified it by offering confined media content. Lately, the company has been forced to set a price revision to stem the loss of customers to broadband. These customers want fast connections and AOL is trying to keep them occupied by offering AOL content over any broadband connection. Furthermore, a confined backup dial-up service is also provided for outside connectivity. AOL has also switched to a lower flatrate price to keep the broadband customers [22] 3.2 TIERED-PRICING Tiered-pricing tries to package software benefits according to user necessities and their willingness to pay. This idea to pricing is an effort to link software product costs to detected customer value. IBM is one among the number one software marketer to make usage of tiered-pricing idea that is based on the class of processors for its mainframe computers [23]. The costs to the customers are randomly augmented when software is executed on a more powerful system, augmenting profits for IBM. The logic involved in this states that more powerful systems augments the user productivity and return

on investment. The added benefit to IBM of this idea is IBM's cost did not augment proportionally, resulting in more profit. The premise is that the customer should be willing to pay more for the increase in value. Since customers were doubtful of unmeasured increases in productivity, and aware of IBM's software economics, this methodology augmented the already high pricing tension between IBM and its customers. Tiered-pricing is considered more favorable when the customer can easily see the increased in value received and the pricing plan offers desired choices. Nokia lately innovated pricing tiers for its software development tools [24]. The developers forum is currently free, but big users of support services will be charged on a tiered basis for lot of services. In the same way Adobe introduced tiered prices for its Acrobat products based on how customers use them [25]. This can be interpreted with an example where customer create PDF documents, add comments, and signs them will pay in addition to the customer who has only created PDF documents. 3.3 USER-BASED PRICING This is another cost-based pricing method that have the tendency to benefit the vendor more than the user by maximizing license fee revenues. The charge is based on the users count that utilizes a collection of software features over a given time frame. It tries to assign costs to a specific number of users or workstations. It is a simple model to work as compared with tiered-pricing based ideas. The principal variation on this subject are described below: The problem which software vendors is facing boldly is that nobody knows how to define what a user is anymore?. In case of outsourcing, a user could be someone outside the corporation. Userbased pricing also let users pay for the software that may not be used as much as it is needed to justify its cost [28]. 3.4 USAGE-BASED PRICING In usage-based pricing customers pay only for what they actually use on a transaction basis. This model is also known as network-based pricing model. It is often connected with an application service provider 3.3.2 HIGH WATER MARK PRICING In this charges are based on the maximum number of parallel users over a given time frame. 3.3.3 PER CLIENT PRICING This is similar to per user pricing, except that the license is designated to the workstation and can be used by a assigned number of users. 3.3.1 PER-USER PRICING These are prices to the individual user who in a typical manner can use the product on an unlimited basic for the term of the license [26]. The price is basically set on assumptions about product costs and customers usage. This idea in a typical manner offers one price for a specified number of users. Oracle has lately introduced user-based pricing for its E-Business Suite. The objective is to provide a simple licensing model that is sensitive to the customer's changing, and sometimes unpredictable Information technology needs [27].

(ASP) model [29]. This model bills for outsourced services by transaction, time in use, peak period, or some other subscription metric. The application is delivered over the web. In a typical manner users pay a minimal set up charge, the usage fee, and for service and support. In addition to the lower total cost of ownership for the application service provider model, customer can deploy their applications more quickly, which reduces their marketing time.

manner have low reservation prices. The penetration pricing strategies brings benefits that are seen as industry standard at a price that is sufficiently low to generate increases in sales volume creates customer value. 4.1.2 LOW-PRICE LEADER low-price leader aims buyers with low reservation prices. This idea targets the mass-market buyers with reasonable features at a low price. The competing pricing objective recognizes that the market has reached maturity. For example Linux and StarOffice are making use of this strategy to mark Microsoft. Sun Microsystems initiated their plan of attack on Microsoft's desktop software by charging only $100 per user for a suite of StarOffice productivity applications that also includes JavaLinux, Mozilla browser, Java security, and email [26]. The average per user license fee of Sun Microsystems is forty to fifty percent of that set by Microsoft [32]. Buyers following and economic value added (EVA) model would be drawn attention to the lower software prices that would augment return on investment provided the features, benefits were industry standard. 4.1.3 EXPERIENCE-CURVE PRICING Experience-curve is a competitive strategy that aims buyers with low reservation prices. The initial price is set below cost in order to build volume and move more speedily down the cost curve toward profitability. The initial price is planned to supply volume quickly and keep out of competition. Vendors that market shrink-wrapped consumer software may use this idea to aim high-volume price-sensitive segments in mature markets

As discussed in 3, software vendors often deal pricing from the requirements to cover costs and attain profit objectives-often to the loss of their customer relationships. The circular logic of the cost-based idea where costs sets price and price impacts sales volume throws into confusion the pricing process. The answer to value-based pricing favorable outcome is the recognition that the price the customer is willing to pay depends on the customer's value requirements, not the vendor's. Buyers make decision about benefits and prices and select those products that maximize their perceived value. The objective of value-based pricing is to provide more advantageous pricing by gaining control over value. That price should, in turn, decide the level of product development cost that the customer is willing to occur. 4.1VALUE-BASED SOFTWARE PRICING 4.1.1 PENETRATION PRICING STRATEGIES The penetration strategies aims market segments where buyers have a high level of price sensitivity [30, 31, 33]. Price-sensitive buyers in a typical

4.1.4 BUNDLING This strategy have more than one applications that are packaged together and priced as a single product. It also aims buyers with low reservation prices. It is basically a product-line idea since it maximizes sales of complementary products within a product line. There may be disparity in preferences for each individual product, but overall demand is augmented if the value is perceived to be greater for the bundled package. A good example is Microsoft Office Suite. The aim is to provide outstanding value by bundling products that are used together at an attractive price. Microsoft has advantage since their additive packaging costs and transaction costs are minimized. Bundling augments volume and penetration while creating hindrance to the competition [30, 21] 4.2 SKIM-PRICING STRATEGIES Skim strategies aim buyers that are relatively insensitive to price [30, 31, 33]. These strategies have high search costs. Some of these strategies are involved in search behavior and see a high level of value in features, and benefits of the product. For example innovators are often ready to pay more since they see opportunity in their ability to exploit the unique value of a new product. Others are not ready to search and see the high price as a signal indicating high quality 4.2.1 PRICE SIGNALING This idea is often used for segment differential pricing of new products where time is a main factor in the decision process. Innovators with high search costs and high level of trust in the trademark do not

want to invest to a great extent to evaluate product alternatives. Information about price is more easy to get than that about quality or performance. The high are price signals the high are the benefits these buyers desire [34, 35, 36, 37]. In this situation buyers demand a high level of service and quick response for their continued loyalty. 4.2.2 REFERENCE PRICING Referencing pricing strategy involves competition which is a variant of price signaling. In this buyers have high search costs and see high risk than the innovators. Referencing pricing strategy need a reference point to measure the value in the pricequality relationship. Using this idea can benchmark the higher price of an established competitor. When the higher-priced products are compared, show up the value of the reasonable priced product and vice versa [38, 30]

PRESTIGE PRICING This is a product line strategy that targets customers with high search costs who are attracted to trademarks that have attain a reputation for high quality and elegance [36, 37, 33]. The buyer's self image is emotionally linked to the trademark image. Buyers have expectations for elegance and high levels of support and service. 4.3 HYBRID PRICING STRATEGIES Hybrid strategies combine constituents of skimming and penetration strategies. The potential buyers can be distinguished by the combinations of high search costs, low reservation prices, and special transaction costs. Special transaction cost might include

complicated and costly evaluation process for the switching cost for changing software vendors. 4.3.1 COST-PLUS PRICING Cost-plus pricing strategy is a competitive pricing idea that is used by the software marketer that creates systems for the government, or other big customers, where uncertainty involved are difficult to measure, and special transactions costs are high. This strategy assures the marketer a rate of return on project costs [39, 40]. This strategy should be arranged as a skimming strategy since cost usually are higher than budgeted. In response to the high prices that originates as a outcome from cost-plus, government customers place commercial off-theshelf(COTS) pricing specifications in the contract where non-custom software applications can meet their requirements. 4.3.2 COMPLEMENTARY PRICING It is a product-line strategy that taps the special transaction costs of products that are used collectively but sold separately [21, 40]. The base product (i.e., product-line pricing ) is sold at a low price that minimizes resistance to purchase. Higher profits are then made on the complementary consumable products (i.e., product-line pricing) or services due to the special transaction costs. For example application service provider(ASP) software investment services and minimize the front-end costs by special transaction

virus software and virus definition support. The loss leader idea is a variant approach. The complementary pricing strategy is used by the software house(SPSS, Inc) incorporated in Chicago. The company does a license marketing for a basic package of statistical programs at an appealing price, especially for academic users. Intellectual users that choose for extra

functionalities are charged a payment for extra programs that rely on the functionality of the base module. Microsoft continued complementary pricing to take advantage of its complementary relationship with computer manufacturers such as Intel micro processors to attain exclusive pricing power control for operating systems and office application software. The company is also putting its efforts to use a complementary pricing idea with its web services offerings and furthermore, meeting customer resistance as it returns back to a costbased pricing mentality [41]. 4.3.3 PREMIUM PRICING Marketers address diverse groups of customers by making use of product-line strategy that addresses the higher search costs of some groups and the lower reservation prices of others [46]. This work is also known as price lining. The idea is implemented by pricing versions of the product to address entry level, intermediate level, and high-end payment buying customers. Prices are set, based on the levels of the value the buyer sees in each market segment. For example, EndNote is a famous bibliographic software product that is priced differently for students and professors, although the functionality

removing the necessity for purchasing softwares or servers [29]. Profit is successfully assured on the higher amount due to complementary transactionbased services and support. The same relationships occur in the selling of printers and ink, and anti-


of the product is identical. Professors pay twice as much as academic students. The logic which is involved is that the student market (i.e., low reservation price) is much bigger and has lower unit costs , than the professional market (i.e., high search costs), which is small and sees higher product advantages due to publication requirements of their profession [42]. 4.3.4 RANDOM DISCOUNTING A random discounting idea maintains a high skimming price but offers discount on arbitrarily basis as an incentive to new buyers to try the product [42, 40]. The price break serves to draw attention to the product. This strategy can be made applicable for a variant of the application service provider (ASP) pricing scenario where users can try the product at a discount before they sign up for a long term license 4.3.5 PERIODIC PRICE DISCOUNTING The periodic price discounting strategy innovates customer value for successive class of buyers with increasingly low reservation prices. The initial idea pays attention on skimming the inelastic demand of the innovator then reducing prices on a predictable basis as the market matures in order to attract more price sensitive customer groups [40]. Intel make use of this idea to market its microprocessors. This idea works best for the products that enjoy somewhat long technology and market life cycles with several applications across many segments [39]. Software companies generally do not use this idea since they would prefer existing customers to upgrade to the new version where their costs for getting customer

would be zero. 4.3.6 SECOND-MARKET PRICE DISCOUNTING In case of second-market price discounting, marketers present an existing product to a new market where buyers are more price-sensitive than the primary market, and furthermore have identifiable special transaction costs. For example, Microsoft has offered second market discounts to the buyers that are looking attentively for the implementations of Linux based operating system in the server market [17]. Microsoft is also contributing a standard solution with predictable costs versus the Linux installation that might generate higher installation, customization, and maintenance costs. The second market pricing discounting is often used to enter in international market and private generic product market


As the software business develops and involves more competition, it is increasingly significant that pricing strategy be based on perceived customer value. The scheming of the software should be with the knowledge of how customers value particular attributes and how much they are willing to pay for them. It is a fact that those software products that deliver superior value will prove to be a success in the market place. In order to be successful, software development must become more value based. The following discussion look over the fundamentals of customer value analysis and the factors that drive the customers perceptions of value. 5.1 CUSTOMER VALUE ANALYSIS As we examined above, software marketer in a


typical manner pays attention on cost-based metrics to arrive at their product prices. Once the marketer has quoted a price, potential customers without any difficulty can compare the price with offers from the competition. On the other hand, if the marketer instead offers demonstrably superior value, even at a higher price, the gain is far less easily duplicated by the competition [38]. The following value ideas are fundamental to the development of value-based pricing strategies. 5.1.1 PERCEIVED VALUE Not all the customer value drivers have economic effect that can be measured directly. A software product that has better graphical display may be more charming to the eye, but has no value in the conventional economic sense. A buyer may feel safer to buy software from IBM if there is a higher perception of reliability, trust, and commitment to the market, but it is difficult to measure objectivity in product value terms. One practical method that is often used to measure perceived value is conjoint analysis [43, 44]. This practical method enables managers to compute the consumers utility functions for individual variables and to understand how they are combined, traded off, and otherwise valued. The conjoint analysis is beneficial for pricing since the feature trade offs at different levels of price can be mapped [45, 46]. 5.1.2 ECONOMIC VALUE TO THE CUSTOMER (EVC) The economic value to the customer is alternatively known as value in use. EVC is the highest payment that a customer would be ready to pay for the software, on the assumption that customer is

informed about the product and competitive offerings. It is similar to the reservation price. EVC basically answers the question what is worth to the customer?. EVC also calibrates the life cycle economic expenditures and advantages to the user of one product when compared with a reference product. Software products are evaluated on purchase price, installation costs, maintenance costs, operating costs, disposal costs, and advantages that can be converted to money over the use cycle. These costs and revenues are standards against the buyer's reference point [38, 47] 5.1.3 ECONOMIC VALUE ADDED (EVA) Generally stated, economic value added measures a company's net operating profit after taxes. It concentrates on the company, on earning a target rate of return, over and above the cost of capital [48]. Both software developers and buyers use the idea to answer the question about the asset generation returns above the cost of capital. If we talk about software or other Information technology investments, customers substitute the monetized net financial benefits of the investment for net operating profit. Moreover, EVA forces managers to measure the financial impact of software investments and to be aware of the capital cost impact on the investment returns. 5.1.4 PRICE SENSITIVITY MEASUREMENT (PSM) Price sensitivity measurement models are beneficial for estimating market demand and for calculating the proportion of buyers that would buy the product within a specific price range [49, 30]. PSM decides the limits of buyers resistance over a range of prices


that relate to the product's value perceptions. These value perceptions are market specific and based on the buyer's perceptions of product value, buying intentions, and expenditure capabilities. The outputs from the model in a typical manner are the upper and lower bounds for the acceptable price range and the optimal pricing point. In a nutshell, PSM is a very useful for pricing alternate software configurations in the early stages of development and throughout the development cycle. 5.2 CUSTOMER VALUE DRIVERS In order to create the foundation for setting prices, it is a necessity that a product developers and managers should understand what the customer's value drivers are, and how significant each is in the purchase decision making [50, 51]. Customer value drivers are emotional link that summarize customer beliefs about the product and company, create positive attitudes and feelings, provide the basis for differentiation, and provide the reason to buy [50]. Value drivers are the expression of the customers evaluations of the product, the perceived credibility of the vendor, and the confidence the customer has in the trademark [52]. The customers value drivers need to be reflected in the design requirements of the software if the value is to be subsequently captured by the pricing mechanism on the product's launch

market, vendors must know the value that customers see in the product. This classification includes identification of the customers value drivers, price sensitivity, Economic Value to the Customer(EVC), and other price related characteristics. This classification may include an assessment of the attribute (i.e., feature-advantages) trade offs that customer is willing to make at various price levels. Once the price the customer is ready to pay is known, this information is integrated with cost-volume estimates to know if the product, as configured, can be sold at a profit [53]. This kind of information, which is interactive with the market, can be used to adapt the product's design to gratify the customer's value expectations or to call off the project.


6.1 THE VALUE-BASED PRICING MODEL Customer-value based pricing idea is particular to market segment, since value perception vary between customer groups. After choosing the target


management oriented economic analyses, and Figure 2: Model for the development of customervalue based pricing strategies [53] Price strategy relies on the software vendor knowledge of customer characteristics (i.e., value drivers, search costs, reservation prices, transaction costs, buying situation), the competitive situation, product cost, and pricing aims. The mechanics shown in the figure can be assessed at any time in the development process in order to associate customer price perceptions to product configurations. This initial-stage examination, by linking product cost estimates to anticipated prices, can help to determine if a particular product configuration should be pursued [10, 49, 54]. The information about the price gained in this way can be used to price the products for launch and to check post-launch pricing capacity. This type of value-related information is greater in quality to the cost-oriented method that is most often used to predict the product costs, project managerial rules. Adding a margin to standard cost is not a protective way to price software products [41, 17, 18]. Software companies are required to use value-based pricing methodologies that model actual customer value, price sensitivity, and values in use scenarios [19, 20]

The paper presented a review of coeval cost-based software pricing models. These models have developed from a financial view based on the production, distribution, and consumption of software product, services, and with the theory and management of economic systems and internal costdrivers of the software life cycle. As software markets have become more competitive and buyers are faced with more options, cost-based pricing models that ignore customer-value necessities can no longer assure a favorable rate of return to the software marketer. A systematic analysis of customer value drivers indicates the cost-based models attracts to price-performance value drivers


with assurances of improved return on investment (ROI) for the customer while neglecting other potentially more significant value drivers that are more impalpable in nature. The significant contribution of this seminar paper is the elaborated discussion of value-based pricing methods as they are related to the software industry. The article develops a prescriptive pricing taxonomy that displays the relationship between customer characteristics, company aims, and pricing strategy. It also suggests that in depth knowledge of the customer can result in more appropriate methods to pricing strategy.

[4] T. Nagle and R. K Holden, "Profitable Pricing: Guidelines for Management," vol. 8, J. A. Associates, Ed. London: Sterling Publications, 1992, pp. 151-56. [5] P. Wallison, "Accounting Lags Behind A Knowledge Economy," in Financial Times, U.S. ed. New York, 2004, pp. 13. [6] A. Rappaport, Creating Shareholder Value: The New Standard For Business Performance. New York, NY: Free Press, 1986. [7] R. Cooper and R. S. Kaplan, "Measure Cost Right: Make the Right Decisions," Harvard Business Review, pp. 96-102, 1988. [8] B. W. Boehm, Software Engineering

The author wishes to thank Dr. Nilay Oza together with the reviewers for their valuable insights.

Economics. Englewood Cliffs, New Jersey: PTR

[1] G. D. Kortge and P. A. Okonkwo, "Perceived Value Approach to Pricing," Industrial Marketing Management, vol. 22, pp. 133-140, 1993. [2] J. M. Keen and B. Digrius, Making Technology Investments Profitable: ROI Road Map to Better Business Cases. Hoboken, New Jersey: Wiley, 2003. [3] H. T. Johnson and R. S. Kaplan, Relevance Lost: The Rise and Fall of Management Accounting. Cambridge, MA: Harvard Business School Press, 1991.

Prentice Hall, 1981. [9] B.W. Boehm, C. Abts, A. W. Brown, S. Chulani, B. K. Clark, E. Horowitz, R. Madachy, D. Reifer, and B. Steece, Software Cost Estimation With COCOMO II. Upper Saddle River, New Jersey: Prentice Hall PTR, 2000. [10] S. Faulk, R. Harmon, and D. Raffo, "ValueBased Software Engineering (VBSE): A ValueDriven Approach to Product-Line Engineering," presented at First International Conference on Software Product-Line Engineering, Denver, CO, 2000.


[11] B. P. Lientz and K. P. Rea, Project Management For The 21st Century, Third ed. San Diego: Academic Press, 2002. [12] S. McConnell, Rapid Development: Taming Wild Software Schedules. Redmond, Washington: Microsoft Press, 1996. [13] R. S. Kaplan and R. Cooper, Cost & Effect: Using Integrated Cost Systems to Drive Profitability and Performance. Boston: Harvard Business School Press, 1998 [14] J. K. Shank and V. Govindarajan, Strategic Cost Management: The New Tool For Competitive Advantage. New York: Free Press, 1993. [15] T. Leavitt, "Marketing Success Through Differentiation: Of Anything," Harvard Business Review, vol. January-February, 1980.

2002. [20] T. Smith, "Why Enterprise Software Pricing is Such a Problem," InformationWeek, 2002. [21] T. T. Nagle and R. K. Holden, The Strategy and Tactics of Pricing: A Guide to Profitable Decision Making, Second ed. Englewood Cliffs, New Jersey: Prentice-Hall, 1995. [22] F. F. Bilstein and F. Luby, "Casing America Online's Faltering Flat-Price Model," in The Wall Street Journal, 2002. [23] Anonymous, "Taking the Cue From Big Blue," in Datamation, 1987. [24] J. Blau, "Nokia Plans New Software Developer Program," in InfoWorld, 2004. [25] J. Fortt, "Adobe To Use Tiered Prices for

[16] G. M. Erickson and J. K. Johansson, "The Role of Price in Multi-Attribute Product Evaluations," Journal of Consumer Research, vol. 12, pp. 195199, 1985. [17] A. Gilbert, "The State Of Software Pricing," InformationWeek, 2001. [18] A. Gilbert, "Software Execs Bash Their Industry's Approach," in CNET News.com, 2004. [19] T. Smith, "Lack of ROI, Pricing Issues Irk Enterprise Software Customers," in Internet Week,

Acrobat Products," in San Jose Mercury News. San Jose, 2003. [26] C. Babcock, "Sun Offers Per-User Pricing For Software," in InformationWeek, 2003 [27] C. Babcock, "Sun Offers Per-User Pricing For Software," in InformationWeek, 2003 [28] T. Sullivan and E. Schwarz, "Retooling Software Pricing," in InfoWorld, 2001. [29] Anonymous, "Pay-As-You-Go is Up and


Running," in Business Week, 2004, pp. 93-94. [39] M. V. Marn, E. V. Roegner, and C. C. Zawada, [30] K. B. Monroe, Pricing: Making Profitable Decisions, vol. Second. New York: McGraw-Hill Publishing Company, 1990. [40] G. J. Tellis, "Beyond the Many Faces of Price: [31] V. R. Rao, "Pricing Research in Marketing: The State of the Art," Journal of Business, vol. 57, pp. S39-S60, 1984. [41] R. Enderle, "Microsoft Has a Bad Case of the [32] L. Greenemeier, "Sun Readies New Software Pricing Plan," in InformationWeek, 2003. [42] C. R. Duke, "Matching Appropriate Pricing [33] H. Simon, Price Management. Amsterdam: Elsevier Science Publishers, 1989. [34] A. Gabor and C. Granger, "The Pricing of New Products," Scientific Business, vol. 3, pp. 141-50, 1965. [35] A. Gabor and C. Granger, "The Pricing of New Products," Scientific Business, vol. 3, pp. 141-50, 1965. [36] L. Greenemeier, "Sun Readies New Software Pricing Plan," in InformationWeek, 2003. [37] K. B. Monroe, "Buyers' Subjective Perceptions of Price," Journal of Marketing Research, vol. 10, pp. 70-80, 1973. [38] J. L. Forbis and N. T. Mehta, "Value-Based Strategies for Industrial Products," Business Horizons, vol. 24, pp. 32-42, 1981. [44] J. Morton and H. J. D. Jr., "How To Diagnose What Buyers Really Want: Conjoint Scaling is Revolutionizing Business/Industrial Market Research," Business Marketing, pp. 70-83, 1985. [45] M. Crawford and A. D. Benedetto, New Products Management, Seventh ed. New York: McGraw-Hill Higher Education, 2003. [46] P. Green and V. Srinivasan, "Conjoint Analysis in Marketing: New Developments with Implications for Research and Practice," Journal of Marketing, [43] R. Kohli and V. Mahajan, "A ReservationPrice Model for Optimal Pricing of Multiattribute Products in Conjoint Analysis," Journal of Marketing Research, vol. 28, pp. 347-54, 1991. Strategy with Markets and Objectives," Journal of Product & Brand Management, vol. 3, pp. 15-27, 1994. Big Company Disease," 2003. An Integration of Pricing Strategies," Journal of Marketing, pp. 146-160, 1986. The Price Advantage. Hoboken, New Jersey: Wiley Finance, 2004.


vol. 54, pp. 3-19, 1990. [47] D. Lee, Value-in-Use and the Opportunity Concept. Lancaster, PA: Technomic Publishing Company, 1978. [48] J. Berry, "ROI Guide: Economic Value Added," ComputerWorld, 2003. [49] R. Harmon, D. Raffo, and S. Faulk, "Incorporating Price Sensitivity into the Software Engineering Process," presented at Technology Management for Reshaping the World: Proceedings of the Portland International Conference on Engineering and Technology (PICMET), Portland, OR, 2003. [50] R. Harmon and G. Laird, "Linking Marketing Strategy to Customer Value: Implications for Technology Marketers," presented at Portland International OR, 1997. [51] W. C. Kim and R. Mauborgne, "Value Innovation: The Strategic Logic of High Growth," Harvard Business Review, pp. 103-112, 1997. [52] J. N. Sheth, B. I. Newman, and B. L. Gross, Consumption Values and Market Choices: Theory and Applications. Cincinnati, OH: Southwestern Publishing Company, 1991. [53] D. Moschella, Customer-Driven IT: How Users Conference on Management of Engineering and Technology (PICMET), Portland,

Are Shaping Technology Industry Growth. Boston, MA: Harvard Business School Press, 2003. [54] J. McCarthy, Dynamics of Software

Development. Redmond, Washington: Microsoft Press, 1995.